Decomposing Firm Value

What are the economic determinants of firms' market values? We answer this question through the lens of a generalized neoclassical model of investment with physical capital, quasi-fixed labor, and two types of intangible capital, knowledge capital and brand capital. We estimate the structural model using  firm-level data on U.S. publicly traded firms and use the parameter values to infer the contribution of each input for explaining firms' market value in the last four decades. The model performs well in explaining both cross-sectional and time-series variation of firms' market values, with a time series R2 of 71% and a cross sectional R2 of 94%. We find that, on average, physical capital accounts for 29.6% of firms' market value, installed labor force accounts for 27.2%, knowledge capital accounts for 6.1%, and brand capital for 37.1%. These values vary substantially across industries and over time. We document that the importance of physical capital for firm value has decreased over time, while the importance of labor and brandcapital has increased, especially in industries that rely relatively more on high skill workers than on low skill workers. Overall, our value decomposition provides direct empirical evidence supporting models with multiple capital inputs as main sources of firm value.